tv Your Money CNN July 3, 2011 3:00pm-4:00pm EDT
time, we'll hear from a marine who was severely wounded in iraq. he started a charity to actually help other wounded warriors. >> my wife and i thought, why can't we make a shirt all can wear with pride and let everyone know who they are so they can say thank you many times over. i'll be back two hours from now to tell you about the t-shirt he's wearing there, iraq and back. and why it is now so hugely popular. and how you're already pitching in to help out. i'm fredericka whitfield. "your money" starts right now. who gets paid and who doesn't? that's the question that treasury secretary tim geithner may be forced to answer if the debt ceiling is not raised by next month. welcome to "your money." i'm ali velshi. what is it? chaos, catastrophe? no one can say for certain what's going to happen if the debt ceiling isn't raised. the prevailing thought is that
those who hold u.s. debt, bond investors would be paid first to keep america from defaulting on loan payments, payments we use to keep the engine of our economy running. what about everybody else? according to the bipartisan policy center, it would be impossible to keep paying for all of the most popular and important programs that you rely on. that means possible reductions or delays to social security, medicare, medicaid, food stamps, maybe checks to federal workers, some combination of the above. jean sahadi is with us. every week we layout a confusing scenario and jean helps us make sense of it. what is likely to happen if we hit this deadline without a deal to raise the debt limit? >> you mentioned that report. they estimate a lot of bills won't be paid. somewhere between 40 to 45%. that's a lot of bills.
it is the social security recipients who could be affected. it could be our military, our federal workers. the truth is it will be a chaotic situation choosing who gets paid situation choosing who gets paid and who doesn't. that's going to create some bad blood. it's an unnecessary situation from the administration's perspective. congress could, in fact, not let that happen. they could step up and make a decision about raising the debt ceiling. even one of the world's largest bond investigators, mohamed arien, he's been a big proponent of debt reduction plans. he says when it comes to kicking the can down the road, kick the down the road a little bit. this is serious. >> harvard professor ken rogoff is a former chief economist for the international monetary fund. ken, listen to this with me. republican senator kay bailey hutchison said we're about to find out how serious the obama administration is about reducing spending. listen to what she said. >> you do the things that are essential. this is where the administration
is going to be tested. if they won't make an agreement that will have spending reforms, if they start doing the chicken little thing by not paying social security recipients or people in our military or interest on our debt and instead choose to cut the things that will hurt the most but not the things that they could cut responsibly, that's going to be the test that they're not serious. >> ken, she's talking about a test. is this a logical test? if you strongly believe that spending needs to be cut or taxes need to be raised or somehow the budget needs to be dealt with, is this the way to keep the administration's feet to the fire? >> i think this is nuts. it's taking a huge risk. it's like we have a train going 100 miles an hour towards a dra bridge and they're deciding whether to raise it at the last minute. it's too late. you can talk about a year from now or long-term deficit
reduction plans and by all means let's do it. but you can't not raise the debt ceiling. it will be utter chaos. it will cost us tens of billions of dollars. >> this is interesting. people are talking about it as a cost-saving measure. if you can pressure the administration and congress into cutting spending, it will save money. but the danger is in doing so, it could end up costing more money. diane swank is a chief economist. at a press briefing this week, president obama made clear that he thinks we need a deal on the debt ceiling. >> we have to seize this moment and we have to seize it soon. the vice president and i will continue these negotiations with both leaders of both parties in congress for as long as it takes. and we will reach a deal that will require our government to live within its means and get this economy moving. >> you all live in worlds that
are highly specific. you have data that has to be analyzed we're a month away from this. we hit the debt ceiling back in may. and we're still talking in broad generalities dictated by philosophy and ideology. everybody is saying what they think we should do largely but nobody has really got i plan. i would think at this point different sides should be negotiating details. >> you're absolutely right about that. in fact, i just got back from europe where i met with economists from all over the world. they think we're nuts. they're dealing with riots in the street in greece and they've got real insolvency problems, real default problems and they can't believe that we would threaten one when we don't need to. i agree 100% with ken on long-term deficit reduction. actually, it is going on. i've worked with the bipartisan committees and the nonpartisan groups trying to get things committee together. the gang of five or gang of six, they are looking at structural reforms, long-term deficit
reduction. but there's no time at this point in time to tie to it the debt ceiling. they could come to an agreement in principle. but there's no time to write legislation and pass it at this time of the game. to play chicken with this, we've gotten threats from the rating agencies on our credibility as a country to serve our debt. this is just nuts. >> just keep your calendars free on the night of august 1st. if this deal gets done, you know it's not going to get done a minute before it's supposed to get done. >> which is ridiculous. >> it is. one of the excuses some people are using for not supporting this is that there's a doomsday scenario out there which isn't true. i want to take you back a couple of years to the day -- the sunday when it was announced by a lot of smart people here in new york city that lehman brothers was going to be allowed to collapse because the market would be able to absorb that. guess what happened? global capital markets and credit markets froze instantly. nobody really knows how serious
or how not serious it's going to be. it's quite a risk. >> it certainly could be a progression of from bad to worse. if august 3rd comes and they haven't raised the debt ceiling, it's plausible to say not too much will change. poor tim geithner will not have a summer vacation but he'll have to make tough decisions, decisions about who not to pay. i disagree with the notion that we're going to save money if they just prioritize spending. the governor contractor already signed a contract -- >> >> this is the tv you already bought, this is the house you bought -- it's two separate discussions, right, ken? i think there's a very valid -- i think most americans would agree, very valid discussion to be had about holding on to spending, controlling spending and ideological differences. we're talking about bills we have incurred. >> that's exactly right, ali. we have already spent the money. we have signed the contract, what jian and diane are saying is absolutely right. it's too late.
it's not, hey, i didn't mean to spend that much last year. we made the decisions already. you can talk about going forward. it's a lot of grandstanding and posturing. and indeed, some countries take a real crisis to make these decisions. we need to change our course. but this kind of super artificial crisis is a little scary because if something goes wrong and they don't do their homework a day in advance like president obama's daughters, i have to say my daughter sure noticed that -- >> i reminded my kids, too. >> we could have a disaster. if we could package that, we could get out of our productivity slump. >> let me ask you this, diane. there is also an argument out there that says for all the danger that the world -- from a credit perspective will disrespect the united states if it has to miss payments on commitments it's already made, there are those who say the world will respect the united states for seriously looking at its budget and taking tough decisions. do you believe that could be plausible?
>> the world will seriously respect us if we take a look at our deficit -- long-term deficit reduction over the next ten to 15 years and come up with a plan. it has nothing to do with the debt ceiling. i've already -- i've talked to all of these people. these are investors, these are financial leaders among some of the top banks around the world. and they think we're nuts. they just can't believe we would do -- >> we're doing this as an either/or, when smart people say they are both necessary, you have to raise the debt limit and deal with the budget. >> absolutely. >> the united states is unique in this business of having a debt ceiling that has to be constantly dealt with by congress. most countries deal with it in a different way. >> i think everybody has some procedure like this. where we are unique is it's become such a defining moment, the house has found that they have a tool, they can get power they didn't realize they had. but if we regularize this, one day we'll screw up and we'll actually have a default and it
will be a mess. >> stay exactly where you are. the housing bust triggered our financial meltdown. and the housing recovery continues to be missing in action. are we getting any closer to solving that key problem in our economy? for those of you with a house to buy or a house to sell, i'll tell you what's ahead for housing. stay with us. hey can i play with the toys ?
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so how did america go from boom to bust? the short answer in this particular case was housing. from consumers to major banks, it seemed everybody was tied into a boom in housing prices, and anyone who wanted to could get a mortgage. the recession ended two years ago. but the housing market continues to stumble. recently, though, we've been getting mixed signals. in may alone, existing home sales were down another 15%. 1 in every 605 housing units received a foreclosure filing last month. that could be from the first process to where you turn in a house. a third fewer foreclosures than a year ago. at least housing prices stopped dropping in april. this data may sound bleak to you but if you have the money and you're ready to buy, i continue to argue that this would be a good time to do so because prices may be drop further but they're pretty low. as for your mortgage, really nowhere for interest rates to go but up. let's go back to ken rogoff for a moment.
q.e. 2, the second stimulus, the second quantitative easing, the money that the federal reserve has put into the economy ended this past week. if the fed is really done pumping money into this economy, isn't it logical that interest rates would start to go up? >> well, first of all, the economy's really soft and maybe gotten softer as they've started withdrawing the stimulus. and that keeps interest rates down. second of all, i really think it didn't do that much in the end. it had only a fairly marginal effect. it had a lot of ceremony and theatrics. they didn't do it forcefully enough or big enough to have an effect. that's why withdrawing it is a big moment in some ways but not hitting markets like people thought it might. >> let's tie it back to the conversation about the debt ceiling. in theory, if one misses a payment -- think about this as your mortgage or your credit card -- if you miss a payment or signal you're going to miss a
payment, your interest rate tends to go up. is that likely to happen to america and for people with mortgages and loans? >> a lot of bond investors i've talked to said, if we don't raise the debt ceiling, rates may still stay low because economic growth expectations have been reduced. markets may worry that it's going to impinge on economic growth even further. it's a possibility. but that's sort of a near-term picture. over the long term, interest rates have nowhere to go but up. and the question is, what would the u.s. do that would trigger something to push them higher? credit rating agencies are not going to like -- if we pay bond investors, that's great. but if we continue to not pay money we owe money to, we're going to be put on ratings watch negative. that is going to reduce confidence in your sovereign credit worthiness. >> if you choose to pay
your mortgage and not your car bill, your credit cost is going to go up. ken, let's talk about the housing market in general. it played such a big part in this boom that got us here, does it have to play a big part in our economic recovery or can we just go on without housing coming back as quickly as we would have liked? >> well, i think we're going to have to go on without housing coming back really quickly. i do think you're right if you have the cash, it might be a good time to buy in some places. but it's hard to get the cash if you don't because credit is pretty tight. in a typical financial crisis, housing is at the center, it takes a long time to work its way out. it comes later than the rest of the economy. i think the rest of the economy will have picked up before the housing market really has a boom again. >> and they shouldn't work independently, right? if the rest of the economy is picking up and more people are working and the stock market which has been doing well but
for the last few months, that should lead to an increase in housing -- housing values? >> of course that is the way it should work. but as ken has written quite a bit about in the wake of a financial crisis, the credit conditions are tight. and with the new dodd/frank bill, there's some 300 different constraints on mortgages going forward. so it's going to get even harder to get a mortgage going forward which will compound the problem in housing. i think it is a great time to buy if you can afford to buy in turnkey properties are seeing some activities because there's not a lot of them on the market. but there's still a big backlog on for closures. we've done nothing to change our legislation on foreclosures to going forward to clear the inventories we have or to stop this problem from happening again. >> we're all optimistic that things can happen in the right direction. we're all fearful that our legislators could do the wrong thing right now. thanks to all of you, ken rogoff, former chief economist with the international fund and
diane swank and jian sahadi. you know we have an unemployment crisis in this country. why it might be worse than you think, but more importantly, how can we actually solve it? we have some solid ideas next. e. ♪ lexus hybrid drive technology is designed to optimize any fuel source on the planet. even those we don't use yet. because when you pursue perfection, you don't just engineer a future-proof hybrid system. you engineer amazing. ♪
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we talk a lot about the unemployment rate in this country. but i want to tell you why that might be a red herring. there are a few relevant indicators to look at if you really want to gauge how well we're doing when it comes to jobs and more importantly creating jobs. let me give you a few different ways of looking at this. let's first look at the pace of job creation. over the past 12 months, on average, the economy has added 72,000 jobs per month. now, this includes months where we've added jobs and months where we've lost jobs. many economists say we need to create 300,000 jobs per month to significantly reduce the unemployment rate to where we were before the recession started. i will tell you that that hasn't generally happened in the entire history of the united states. we are more likely to get into the 200,000 job a month growth rate when we're really doing well. so we're not adding enough jobs. but there is job growth on average over the last 12 months. now, how many different types of industries are expanding? this is relevant because you
don't want to have an economy where you're just adding jobs in the health care sector and the oil industry. over the past 12 months, 69% of sectors have added jobs. that might sound pretty good. but keep in mind we're coming from a very bad place. we lost a lot of jobs. we basically hit rock bottom, losing 8 million jobs during the recession. but the point is there is growth across the board in many industries. let's take a look at the quality of jobs available. more than 8.5 million americans who are currently working part time want to be full time either because they want more hours or they want the benefits that typically come from full-time work a lot of temporary or freelance. mort zuckerman, eliot spitzer and ar rana huffington.
an august panel, i might say. i know you all have opinions on this. i'm going to start with you, mort. you say when it comes to unemployment, we are worse off than we actually realize. >> yes, because the real unemployment rate is close tore 18% than it is to 9%. the reason for that is the average length of unemployment now is 40 weeks. the number that you referred to, the 9.1% put out by the government, the so-called headline unemployment number, they only count people who have applied for a job in the last four weeks. when you've been out of a job for 40 weeks, you don't apply for a job every four weeks. if you measure it by another government stas tick, they measure people who have applied for a job in the last six month s which makes more sense, the unemployment rate is 15.9%, almost 16%. you referred to the quality of jobs. the fact is in each of those months and indeed for the last 2 1/2 years since president obama's been in office, not a single net permanent job has been created. in the last month, they announced there were 54,000 jobs were created.
we lost 140,000 odd permanent jobs. the net job creation is all in part-time work. the problem with that is you get no health care benefits. the median income for people working part time is $19,000 a year. that's how serious it is. >> you're not getting the benefits, which is one of the reasons why a lot of people thought health care reform might be a good idea. eliot, we're sort of fully immersed in a discussion about a debt crisis and about the debt limit. there are a number of people, a substantial number of americans who think that we have prematurely moved on from the jobs crisis, which is really ultimately the place where we'll get the economic growth that solves some of these debt problems. >> you are right about that. i think we have to deal with jobs first. that doesn't mean we don't deal with the debt crisis now. but we deal with it in a way that says we make the very serious cuts in the entitlement programs that need to be made but schedule them so they begin in the years three, four and five.
what we need to do is get the economy booming again. growth is the only way to deal with the debt crisis. jobs is the key not only to the quality of life. it may be worse than what mort said. there are other numbers you can add in there. over the last 20 years, net job creation has come only in government and health care, not in what mike spence, who wrote a brilliant article most recently about the tradeable sector, the part of the economy that is really dynamic, manufacturing, high-tech, no job creation there at all. that's where we need to focus. but in terms of the debt crisis, yes, we have to deal wit now. with it now. but dealing with it now doesn't mean cutting the budget right now. it means cutting it in years three, four and five after the jobs have come back. >> when president obama -- the month he took office, we had lost almost 800,000 jobs then. at that time it was very clear to everybody in america that jobs was the biggest issue. but by the time we got to these mid-term elections, things have changed a little bit and a lot of people felt that it was about debt and deficits.
has the president shown enough urgency and commitment to the addressing the ongoing and lingering unemployment problem? >> unfortunately not. all three of us agree that job is the biggest crisis. obviously deficit is a crisis. but without growth, we're never going to be able to solve the deficit problem. and unfortunately the president's economic team led by larry summers completely miscalculated. they expected real job growth that did not happen. so they instead bought into the republican talking points about the deficit being the primary crisis we are facing. and as a result, now it's ironic. but we are headed to the 2012 election, and the president's possible adversaries, including romney, are making jobs, the absence of job creation a primary attack point against th president. during this week, romney had a press conference about it.
we see "time" magazine talking about the pessimistic index of americans who think this is a lost case. a series of one of the greatest crisis, which is college graduates not being able to find jobs. that's really contrary to the american dream in the sense of outward mobility. >> guys, stick around. we've talked about the problems. now we're going to talk about the specific solutions, from corporate america and government to the jobs crisis, coming up next. different jobs... ♪ ...different challenges. ♪ different opportunities. ♪ so why would universities stay the same? ♪ university of phoenix, because an educated world is a better world.
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we want solutions to the jobless crisis in this country. we've gotten beyond the headline number, that 9.1% unemployment. to tell you a little more about what this looks like, we know if you ask businesses in america or at least some businesses, they'll tell you that the government is holding them back. it seems the majority of the american public might actually agree with them. a recent cnn opinion research poll shows that nearly two-thirds of americans think the government is doing too many things that should be left to individuals and businesses. want to go to arianna huffington, are they right? >> well, at the moment, this is
the new consensus that's emerging beyond left and right that the government needs to do more, that the government needs to do more when it comes to payroll tax holiday, for example, which would help businesses hire more. more when it comes to infrastructure spending -- our infrastructure is crumbling. the government can borrow at below 3%. construction workers are idle. and also more aid to states which are also finding themselves in a position of having to inflict major cuts. this is the time for the government to step in and allow the private sector to begin to hire more. >> but those seem like conflicting things. i'm going to ask you about this, mort arianna's right. the places where most of us feel it is in states that end up cutting benefits. we're seeing this across the nation. what does the government specifically need to do and separately what does business in america need to do to help solve this problem? there is money in the system. >> first place, let's start off with the basic fact.
when you have millions of american families who have home mortgages that exceed the value of the home, it's called negative equity, and when you have millions who have credit card lines that they can't pay back, debt, they now understand, has consequences. that's what made the government debt an issue as well because they translate from personal experience. we have a huge problem of a runaway national debt. we've had $1.5 trillion each year, which is the largest fiscal stimulus. and the american public says it hasn't worked. we haven't created the jobs. the real question is, are there policies that will work? we've lost 6 million industrial jobs in the first part of this century. we created fewer jobs in the first decade -- >> that's sort of secular. we lost jobs that we as a developed economy were -- >> the government -- one of the things the government can do is change the number of h1b visas.
50% of our honors graduates in heart sciences are foreign students. it's crazy to send them back to countries that compete with us. we've reduced the number of visas we give to those folks. that's crazy. what do they do? they work in the singlemost important and expanding industry we have in this country which is based on technology and research and science and we send these people away. that's an example that's pure domestic petty politics. that's one thing that should be redone. the other thing, just to follow on what arianna said, we have a huge need for major infrastructure. one of the great problems of the obama program was they didn't have nearly enough for infrastructure. which would have -- there were many suggestions and i spoke to them about it. i think they know they made a mistake about it. but this was one of the things that could have been going full flush -- >> you saw the trouble with high-speed rail. nobody wants to put the money into the electrical grid. it could create jobs, you're
right. eliot, new york is continually having budget problems. what does government do to either encourage or get out of the way of business? and do you actually believe that government involvement is preventing these companies with all of this money from hiring people? >> look, i don't want to get into the blame game. but i think it is a fact. there's $2 trillion sitting on the side. businesses are not investing it, not because of excess regulation, because there's no demand. we have a demand crisis. we need fiscal stimulus. how you get it in a way that's smart is the hard question. visa reform is critical. infrastructure bank is critical. i would say investment in r & d is critical. i would say in the long run the macro policies of our government needs to change. we have to control health care costs. that's what's putting it at a competitive disadvantage. we need to have an energy policy our energy costs and exportative
capital is killing us. those are the two big macro policies we have to come to grips with. these are the things government can do. then the private sector will invest. the private sector creates jobs. the government macro policies has to permit it to do so. that's where we have failed. go back to jimmy carter's speeches. he was right about energy. he was right about health care. these issues in 30 years, we haven't yet dealt with them. i am in favor of president obama's health care plan. but it doesn't do enough about about cost. cost is what's going to kill us -- >> it provided access, lots of access. >> arianna, we're talking about health care, we're talking about energy, we're talking about infrastructure and education. four solutions -- not solutions but four ideas that the government can play a role in driving the economy. what else does this government have to do? we need to lay out a plan that's going to create jobs. it's not happening on its own. >> it's not happening because the white house conceded the debate. basically what's happened is for
the past few months, there's been so much emphasis on the debt crisis as opposed to the jobs crisis, that there hasn't been a sense of urgency. so there's been no real debate about these issues that we are discussing here. and there are so many things that we can do. you have the co-founder of pimco hardly a associate socialist in favor of more stimulus. the economics editor of "the wall street journal." it's going to make it impossible to really solve the debt crisis. even larry summers came out and said what's happening now with tax revenues being down because incomes are down, it's going to make it much harder to reduce the deficit substantially as opposed to to purely cosmetically which is all we're doing now. >> arianna huffington, the editor in chief of aol huffington post.
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july 4th weekend is here but not everybody's feeling that patriotic spirit, the dream to become an american was crushed for 22,000 immigrants who won green cards as part of the diversity visa lottery, only to be told soon after that it was a government computer error. christine romans is here. also joining me, pete dominick. host of sirius xm satellite radio. 50,000 people from around the world are randomly selected in this lottery every year, no special skill or education required. what do you think of this system? is it a good system, a bad system? >> that's a different story altogether. 50,000 people randomly selected in a sea of -- it's just luck. what's the point? >> i don't know if this is common around the world. are we the only country that does it? >> it's rare. most country try to match skills with what the economy needs, this is meant to broaden out -- most of the people who come to this country are sponsored by somebody else. a lot of people are coming from mexico, central america, canada,
from other countries. this is a way to diversify that pool. for countries that don't send a lot of people, it's a way for people to get in. but 22,000 people? come on. they should just give these people their green cards. >> depicted from a small subset -- >> the first people who applied -- this is way worse than winning the actual lottery. you won $30 million? that doesn't change your life as much as getting into america. >> and for generations to come, yeah. >> but it causes us to have a conversation about our immigration system, which is important. and we should. but do we have the -- attracting the best and brightest and are we keeping them here? that's one argument about the dream act with all of its warts. it would allow the best and brightest to stay here that have grown up here. and do we want to attract the best and brightest immigrants as well. in one case, a woman is a neuropsychologist.
>> there are several classes of visas, medical visas, highly school technical visas. this is just a lottery, just because you're lucky, you get to get a green card. these 22,000 people, i'm just saying, if the government told you you got a green card and took it back -- >> if you're in the group that didn't get one, you're saying, i didn't get a fair chance. that veisa issue continues to b a good debate. another good debate, no security that manufacturing was one of the industries that built america and took quite a beating in the recession. this may surprise you. since 1975, manufacturing output, the stuff we make, has more than doubled, but employment in that sector has dropped by 31%. so the industry, pete, is not dead. we are doing more with fewer people. >> right. >> because of technology and
automason. >> right. technology and automation have taken over. they have replaced humans. there's not much you can do about that. but in america, there is something that we can do to educate our people or to get our young people interested in these engineering and manufacturing jobs, anecdotal, but women -- a friend of mine's young daughter is getting into this. they want to hire people in these jobs but there's a shortage. that's why a guy like me could never do math really good. we need to encourage our young people, especially young girls -- >> yes, i agree with you. but we need to encourage our companies as soon as they can, to not ship all of their r and d yoer ev overseas. the factory floor is where inventions happen. we have moved the factory floor. we keep saying, we don't need the low-skilled manufacturing jobs. it's those jobs where somebody figures out a new way to do something. all of these companies investing billions of r & d in china. >> we can't discount the effective outsourcing. the reality is, even without outsourcing, we still have
increased our output and still have fewer people -- >> technology -- it's both of those stories. not one or the other. >> up until world war ii, we produced everything we consumed. that's capitalism. things are changing. people are getting paid more in china and the cost of fuel for transportation is making it -- maybe slowly we'll see the manufacturing jobs start to come back. >> one theory we've heard from an oil analyst is as the price of oil goes up, it may not be worth it to make steel in china. maybe it's more worth it to make it in america. >> god forbid we make steel in america again. >> cheap food may not be such a bargain. a survey rating the food value staff and speed at 53 top chains. four of the biggest names rated the worst. mcdonald's, taco bill, kfc and burger king. the biggest complaint is the food. i could live on certainly mcdonald's and taco bell and kfc. i'll go to burger king in a pinch. christine, honestly, this is
some of the cheapest food out there. really, people are complaining about quality? i like my mcdonald's -- >> the reason they have all these great sales is people need to buy cheap stuff. that's the most important thing. cheap is trumping quality in some of these cases. i think there's some new surprising answers on there, too. >> chick-fil-a is the best chicken out there. and i love chick-fil-a. >> i do, too. >> my wife would rather have an affair than to go out and take the kids to mcdonald's. i sneak out and go quarterly. if people are concerned about the customer service at fast-food places -- the innovations they come up with, when they pitch, let's wrap bacon and cheese and americans buy it, that's what i'm concerned about, the health costs. >> to recuse myself from the conversation. in-and-out burger -- >> what is that? people love that. >> you get on the west coast mostly. it's got a real lettuce leaf -- >> everything comes in brand new
and fresh. i kind of live on fast food so i kind of get it. >> you live on fast, period, ali. >> i do. pete, great to see you. christine, thanks so much. watch "your bottom line qu. the market can only go two ways for the rest of the year, up or down. i suppose there's a third way, flat. we have investment strategies for you, depending on which way you think the market is going to go right after the break. why don't we have both? [ male announcer ] old el paso. hard and soft tacos. ♪ feed your fiesta.
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the fed stimulus to the economy ended a few days, leaving investors worrying what that means for the economy and particularly for the stock market. this was called qe 2, the 2 is tort second round and the q.e. is quantityive easing. it boosted asset or stock prices but did it kick the economy up enough? a recent poll taken by the
non-profit american association of individual investors asked its members how stocks will do in the next six months. 37% of and 27% are somewhere in mean. i know that doesn't help you all that much deciding what you think is going to happen. jim a-rod from zephyr management is back with us. jim, welcome, thank you. always a pleasure. >> if i agree with the 37% who are bullish, they think the stock market is going to do better over the next six months or year, what should i do? >> well, for the stock market to do better, the u.s. economy has to do better. so you want to buy companies that are leveraged to the u.s. economies. so you would buy small cap stocks because they do all of their business in the united states. you buy a small cap fund such as the t. rowe price new horizons fund which is the grand daddy of small cap funds. >> this has been a big year for small cap funds. look at the one year on this.
42 2/3%. that would have been your return on a $10,000 a year ago. you'd be now around $14,000. one look at a run like that, one wonders if it's got a lot more to go. >> for it to go significantly from here, you have to have an acceleration in the u.s. economy in the second half as the fed believes will happen. if the fed is right, this fund will keep going. >> and for small caps you don't need the economy to be going gangbusters. but it is what you call early cycle stocks. >> you need a growth rate in excess of 3% in the united states for these companies to really show their profit stuff, if you will. so if you believe the economy is going to grow 3% or more, this is the way to play it. >> and this is an area where you do want an expert, because otherwise you are guessing. these are little companies that are not fully capitalized. >> you don't want an index. you want somebody who can find the good companies versus the weak ones. >> what about the other side, 36% think the economy is not going to pick up this year.
i don't think that means you shouldn't be invested? >> no. there will be opportunities. so what you would do then is you would buy large cap stocks with dividends, because large cap stocks have not done as well as small cap stocks. >> so in order to attract investment, they have to pay a little bit. >> right, right. exactly. and so they're more attractively priced. they have good balance sheets. and many of them have excellent dividends. so the it is dividend growth fund buys stocks in companies that have a dividend greater than the s&p in general, and it's really quality like gm and j.p. morgan. you're locking in a yield much greater than the money markets. >> which is virtually nil these days. many on any kind of interest bearing. >> almost nothing. maybe you get 1.3 or 1.4% in this fund, which is great compared to money markets. and then you get the growth of
dividends over time. >> right. >> and you have an option on a growth of the u.s. economy and the world economy, because many of these big stocks have their earnings in the emerging markets. >> okay. let's go there. we worry about the world. we see britain. we see greece. we worry that there isn't growth elsewhere. but there really is. in emerging market there's is hot growth. let's say you're part of the 36% who doesn't think the u.s. economy is going to do well. year worried about some parts of the global economy. how do i tap into those places that are really growing? >> you want to buy an emerging markets fund. if you look at the numbers what is going on in asia and parts of latin america, it's a powerful story. the transfer of wealth, the growth of the middle class, they are where we were in the 1950s. so you would buy something like the lazard emerging markets fund. for some reason they're not accepting money, you buy their emerging markets blend fund. either one of those are good. they are a cadillac of emerging markets investing. and they do their research. they're in the good geographies,
in the good companies. and the growth in the emerging markets is powerful. it's long-term. and they're trading among themselves. >> when you say like we were, their consumer consumption is still high in a lot of these places? >> we have a lot of debt at the consumer level and the federal level. they are growing their wealth. they have high savings. they're now buying toothpaste and technology and computers. and they're building roads. and they have the money to do it. and they're trading more with each other rather than just exporting to the u.s. and europe. so it's a great growth story. >> the great thing here is you're giving people specifics. these are some places where indexes don't do the job. you want a manager. it might cost you a little higher than an index. but you want somebody who studies and knows the difference between this country and that, this company and that. >> yes. >> jim award is managing director at zephyr management. enough with the debt ceiling talks. something has got to happen, and it has to happen soon. we'll get in to it next in my xyz.
with congress and the president to never take us to the brink again. here we are, barely a month to go until the u.s. government will begin to default on its obligations if the debt limit is not raised. this game of chicken has become so ingrained in our politics that our elected officials would risk potential economic catastrophe by dragging us again to the edge of the abyss. by the way, we have already blown through our legal debt limit. we did that back on may 16th. we are now well beyond the point where we should be talking in broad ideological terms about budgets. but now both sides should have been working on specifics to get a deal done. look, the united states is not greece, but we can learn a lesson from what has just happened inside athens parliament, where a majority of greek lawmakers voted for a strict austerity package that could cost them their political lives. but they understood that it had to happen to avoid default, thereby putting the interests of their country ahead of their own interests. that's what we need here. each side needs to give a little more even if it costs them votes
or their seat on election day. we need real political courage. republicans in particular need to stop repeating the phrase we don't have a revenue problem we have a spending problem. saying it over and over again doesn't make it true. we can't keep every tax break in the tax code. look, the stakes right now couldn't be higher. on a sunday night back in september 2008, some of the smartest financial minds in the country gathered here in new york and made a calculated decision that letting lehman brothers collapse would be taken in stride. the next morning global capital and credit markets worldwide seized. the effects of that single decision continue to choke a global economic recovery today. this is bigger. this is about the credit worthiness of the united states of america. the trust that the u.s. will pay for what it has already bought. now the senate is going to stay in session next week. that's a good start. but time is running out, and playing brinksmanship with the debt court of appealing is not an option. is really not an option. that's my xyz. thanks for